The Impact Of Political Uncertainty On Bond Default

In recent years,China’s bond market has developed vigorously and become the world’s second largest bond market,playing an important role in reducing corporate financing costs and promoting financial reforms.With the impact of COVID-19 on the financial market,the steady development of bond market has provided strong support for preventing COVID-19 and improving corporate financing in China.It can be seen that the bond market is related to the rapid development of economy in China,so the study about the bond market is particularly significant.From the perspective of issuers,bonds are divided into interest bonds and credit bonds.Compared with interest bonds,which are endorsed by government,credit bonds are affected by more complex factors,so credit bond default has attracted more attention from investors.Before 2014,China’s bond market was in a state of no default for a long time,which shaped the belief of implicitly government guarantee in the credit bond market.In 2014,the default of bond 102061 broke the peace of the bond market,then bond default events have become more and more frequent.As of December2021,there are 775 default events with a cumulative default amount of 686.6 billion yuan in China.The frequent default events attacked the belief of implicitly government guarantee,and triggered discussions about the reasons for bond default.Although foreign literature has carried out complete and systematic analysis about the default factors,current research can not fully be applicable to China’s market because of the special national conditions.This paper focuses on the status quo that China is still in the transition period of the economic system,and analyzes the role of local governments/officials in the financial market.Different from developed countries,local officials in China are endowed with great motives and power in economic development.Under the institutional background of both political centralization and economic decentralization,on the one hand,under promotion mechanisms,local officials have the motivation to develop the local economy by making policies;on the other hand,local officials have been given important resources and power for policy-making.Under this specific political and economic system,the political environment is closely related to the officials themselves.With the turnover of local officials,the uncertainty of local policy will increase apparently.On the basis of these current situations,this paper explores the relationship and internal mechanisms between local officials’ turnover and credit bond default.Depend on the current literature,this paper selects the credit bonds issued in prefecture-level cities from 2011 to 2020,and manually collects the corresponding data of local officials.Finally,this paper obtains 23,786 sample observations in total.This paper uses both the OLS model and the TOBIT model for regression estimation,adding annual fixed effects and city fixed effects to control the effects of specific years and cities.It finds that local officials’ turnover will significantly increase the default risk of bonds.This effect is mainly reflected in private enterprises,and regions with lower degree of marketization or poorer government-enterprise relations.This paper also studies the effect of officials’ micro-characteristics in this relationship,the results show that the presence of native officials,highly educated officials,and officials with the major of humanities and social sciences,will reduce the impact of officials’ turnover on the default risk.In further discussion,this paper finds that urban investment bonds may be helpful for alleviating the exposure of credit bond default in officials’ turnover,and this bailout phenomenon is more apparent in the central and western provinces.This paper focuses on the behavioral factors of local officials,which provides strong support for precise policy-making to prevent systematic risk.It provides empirical evidence for understanding credit bond risk from China.Because of the specific institutional system,the credit default in China’s financial market is not only effected by the market mechanism,but also influenced by the behavioral factors of local officials.This article provides three policy suggestions as follows: Firstly,maintain the stability of officials,and encourage the selection of knowledgeable and professional officials;secondly,enhance government information transparency,and convey political signals more quickly and efficiently to the market;thirdly,clearly figure out the dividing line between the government and the market,and gradually promote the construction of service-oriented governments.